The new Labour government has wasted no time emphasising pensions as a priority, with a Pensions Schemes Bill included in the King's Speech just one week after the election, and a "landmark" pensions review launched within the first month.

The review is expected to focus initially on increasing investment in UK assets, as Chancellor, Rachel Reeves, previously announced plans to “unlock” billions of pounds of investment from defined contribution (DC) schemes through the review.

This focus on investment has been broadly welcomed by industry, with Hymans Robertson head of pensions policy innovation, Calum Cooper, highlighting the initial focus on investments as a “sound place to start”, placing the emphasis more on what we have and where political capital can be built, not spent.

But this is not a new theme for the industry, as the Labour government's push for greater pension investment in the UK builds on years of growing pressure for pension schemes to increase their UK investments.

But with pension assets increasingly highlighted as a potential solution for various funding gaps, industry experts have been quick to stress the need to ensure that member outcomes remain the priority.

With the focus on pension investments in productive finance showing no slowing, Pensions Age takes a look back at the story of DC investments in productive finance so far, and the industry’s hopes for the future.

The progress on DC investments in productive finance

The catalyst for change around DC investments in productive finance came in July last year, after the Conservative government’s Mansion House reforms revealed plans to “unlock” up to £75bn of additional investment from DC and Local Government Pension Schemes (LGPS).

Announced alongside the broader Mansion House reforms was the Mansion House compact, where nine of the UK’s largest DC pension providers voluntarily pledged to allocate 5 per cent of assets in their default funds to unlisted equities by 2030.

The pension industry was quick to get to work to get to grips with the “avalanche” of pension developments announced as part of the Mansion House speech, with industry experts warning at the time that the government was committing to an “ambitious timetable".

This was not the only concern, as industry experts also highlighted issues around the over focus on cost by those selecting schemes, warning that this could create a barrier to developing stronger long-term value propositions that deliver better consumer outcomes.

The Mansion House reforms were not the only focus in this area though, as the government’s messaging on DC investment in productive finance was also supported by the finalisation of LTAF rules by the Financial Conduct Authority (FCA) in late 2021.

And, in March last year, the FCA authorised the first LTAF, in what was seen as a significant move to boost long-term economic growth and channel capital into unlisted UK companies and infrastructure.

Schroder’s Climate+ LTAF led the way, although other LTAFs have been launched by other major players, including Aviva, BlackRock, Legal & General, and Fidelity International.

The momentum around the Mansion House reforms, continued alongside this growth in the LTAF market, as the government announced the next steps for delivering the ambitious reforms in the Autumn Statement 2023.

In particular, the government committed £250m to two successful bidders in the Long-term Investment for Technology and Science (LIFTS) initiative and said that a new Growth Fund would be established within the British Business Bank (BBB) to complement private investment vehicles.

And progress has continued since, as a recent update by the Association of British Insurers (ABI) showed that signatories of the compact have been making good progress on ambitions to increase investment in unlisted equities.

The ABI found that the compact signatories currently hold around £793m of unlisted equity assets in their DC default funds, equivalent to 0.36 per cent of the total value of their DC default funds (£219bn).

Despite the change in government, the focus on productive finance has showed no signs of letting up, as the push to get more pension money invested in the UK has remained a key priority for the new government, as seen in the launch of its "landmark" pension review.

The industry is already taking the opportunity to respond to this review and outline the key areas where reform could help, with the Pensions and Lifetime Savings Association (PLSA), for instance, urging the government to create more investible opportunities in the UK, and provide policy and regulatory certainty to improve the UK’s appeal versus investment opportunities globally.

In addition to this, Local Pensions Partnership Investments (LIPP) said the government needs to make it easier for the LGPS to invest in the UK, suggesting that up to £16bn worth of capital for infrastructure investment could be unlocked if all the funds in the UK LGPS raised their allocation in the asset class from its current average of 6 per cent to 11 per cent.

But industry experts have stressed the need to maintain momentum and make changes sooner rather than later, with LCP partner, Steve Webb, suggesting that, if the government's review finds that further measures are needed to drive investment, these should be added to the current Pension Schemes Bill, rather than waiting for the next King’s Speech.

While the industry has made significant strides in DC investments in productive finance, challenges remain in balancing costs and achieving long-term value for members.

But with the launch of the landmark review of the pensions system, many are hopeful these challenges will be addressed, paving the way for meaningful reforms that could enhance both member outcomes and the broader economic landscape.

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